How To Easily Create Your Own Balanced Fund

In Canada, balanced funds are more popular than poutine drizzled with maple syrup all while watching the hockey game and saying aboot. Stereotypes are also pretty popular, at least in this corner of the interwebz.

This is especially true for the 96.7% of Canada’s population that are Baby Boomer age or older. This group of people want exposure to the equity markets, but accompanied with large portions of bonds and other safer assets. It’s a smart portfolio move to make when you get a little older, and the income spun off from these funds is pretty essential for someone who no longer goes to work.

So they buy a balanced fund, with typically consists of a 50/50 mix between equities and bonds. Let’s take a little closer look at a couple offered by big Canadian banks, starting with Bank of Montreal.

All info from Morningstar, which is the best when it comes to stuff like this.

So you’ll notice a couple of things. First off, the management expense ratio (MER) is just 1.57%, a fair bit lower than the usual 2-3% Canadians are always said to be paying. That’s hardly cheap for a management fee, but it’s not outrageous, y’know?

The fund’s largest holdings include the usual suspects — government bonds, a couple of ETFs (Canadian Dollar hedged, of course), and banks that aren’t Bank of Montreal, because apparently this fund manager WANTS to get fired. According to Morningstar, the fund has a yield of 3.5%.

Let’s look at another one, this time from RBC.

This one has a 50/50 split between equities and bonds, with the largest holding being Royal Bank’s stock. FINALLY, someone is toeing the company line. You NEVER see that with banks. The yield is a little less than the competing BMO fund, but the MER is a little lower and that fund is a 60/40 equity to bond mix. Essentially, you’re getting paid a little more to take more equity risk.

Let’s keep going. This is the TD Balanced Income Fund. Not to be confused with the TD Balanced Growth Fund, or the TD Comfort Balanced Growth Portfolio, or the TD Emerald Balanced Fund. TD knows who butters their toast, apparently.

TD, guys. We gotta talk.

This fund… it sucks. Like, it’s the worst fund in the world. Not only has it gotten crushed by most other funds over the last while (hence the Morningstar 1-star rating there), but the MER is 2.24% and it only has a yield of around 2.5% even though it’s a 50/50 split between bonds and equities. Whatever you do, don’t own this.

(Looks at assets under management)

(A single tear slowly rolls down my cheek)

Okay, one more. Y’all LURVE Tangerine, so let’s take a closer look at its Balanced Income Fund.

That’s not a bad fund at all. Morningstar ranks it 4-stars, and it only has an MER of 1.07%, the lowest of the group by far. It also tends to do about as well as the index, probably because the fees are so low. The only issue is the lack of yield, but that’s pretty much comparable with the others. Overall, it’s a solid choice for a balanced fund, right up there with BMO’s.

How to build your own

It turns out that building your own is ridiculously easy. Are you ready?

Just buy equal parts of:

iShares S&P 60 ETF, XIU, which yields 2.6%, and has a MER of 0.17%

iShares Canadian Universe Bond ETF, XBB, which yields 2.9% and has an MER of 0.33%

And that’s it. You’ll get a fund that:

Has a management fee of 0.25%, a whole $25 per year per $1,000 invested

A yield of 2.75%, better than many of the balanced funds we looked at

A return that’s virtually guaranteed to beat those established funds, especially the TD one

Is so easy to manage that Air Bud could do it in between games

If you’re worried about interest rates, swap out some of the bond ETF for XSB, the short-term bond ETF

And that’s about it. Rebalance once per year by selling the winner and using it to buy the loser, and you’re in business. Yes, this fund is all Canadian, but a) so are most of the bank-based competitors, and b) if you’re looking for income, it’s best to not screw around with currencies.

More yield?

How about a fund with more yield, but is still simple? Okay, but you’ll have to buy some REITs and preferred shares.

50% XIC, which yields 2.5% and has an MER of 0.27%

25% XBB, which yields 2.9% and has an MER of 0.33%

12.5% XRE, which yields 4.6% and has an MER of 0.60%

12.5% CPD, which yields 4.8% and has an MER of 0.49%

In total, we’re looking at a yield of 3.15%. If you want to increase the yield, give more weighting to the the REITs and preferred shares. You could even add in some high yield U.S. debt, which I think is pretty safe if you buy an ETF of it, but you’d be exposing yourself to currency risk.

International diversification

I’ll build one more model balanced fund, this one with international diversification.

25% iShares MSCI World Index, which yields 1.6% and has an MER of 0.46%

25% XIU, which yields 2.6% and has an MER of 0.17%

25% XBB, which yields 2.9% and has an MER of 0.33%

25% VBG, which is so new it doesn’t have a 12-month yield and Morningstar says it has an MER of 0.00%

I’m not a fan of Vanguard’s Canadian funds, at least for people who need the income. See why here.

You’re looking at a yield of a little over 2% if you assume the new Vanguard fund yields 1.5%, which is the yield of the U.S.-based fund it holds. I can’t say I’d recommend this for someone looking for income now, but it’s not bad if international exposure is something that floats your boat. The fees on this fund would be about 0.30% per year.

If you’re looking to build your own balanced fund, it’s not that hard. Just buy a few ETFs and rebalance once per year. And you’ll save 1-2% per year in fees, which really add up over your investing lifetime.

BTW – Why did you choose that TD fund vs TDB622 (now CTI16)? A very long term return of +8% and a decent monthly payout that is sustainable? Imo the best of the Canadian MI funds. Since the name change it looks like it’s only been around since 2013 on most screeners. Kind of misleading.

There are approximately 3.1 million balanced income funds from TD, like I made fun of in the post. So I just picked one and went with it, assuming they were all about the same. No intentional slight to TD, except for making fun of all their balanced funds.

XBB does not yield 2.9%. You are confusing the 12 month trailing yield with the yield you actually get, the yield to maturity, which is 1.75%. When you deduct the high MER of this ETF, 0.3%, you true yield is only 1.45%. XBB has a large number of premium bonds (because of falling interest rates), which results in a capital loss when they mature, and it is this that results in the lower yield to maturity. Actually, VAB is a slightly better option – it’s much lower MER, 0.12%, with a YTM of 1.61% results in actual yield of 1.49%.

Valid point. But since yield to maturity factors in capital losses on bonds that are trading above par and there’s many years until most of those bonds mature, I don’t think that’s the number to focus on either.